Goods and Service Tax (India)

It’s your birthday treat. You are in a reputed pizza joint with your engineering friends. You order 2 large cheesy pizzas with extra toppings, garlic bread and some soft drinks. Post your treat the waiter gives you a bill and the amount is substantially higher than you expect it to be. An evening well spent in the company of friends is spoiled to some extent. You have to shell out an amount equivalent to a medium sized pizza. You check the bill again and there are terms like VAT, Service tax printed on the bill. These terms sound gibberish to you. You have been taxed heavily for enjoying a delicious pizza.

To a person who is ignorant about the indirect tax structure in India, the extra payment in the form of VAT and Service Tax is all the more annoying. With the roll out of GST, a single uniform indirect tax will be levied on goods and services at the point of consumption wherein the end consumer bears the tax. Presently, Octroi, Central Sales Tax, VAT, Service Tax all form part of the indirect tax structure in our country.

Cheese, Butter, Pizza base and a numerous other ingredients go into the making of your delicious pizza. The moment an ingredient is manufactured, excise is levied on it. If they are sold in a different state, Central Sales Tax (CST) is imposed for inter-state trade of goods. Further these ingredients are transported to the place of consumption where octroi is levied at the check posts. The moment you order your pizza, the pizza shop adds value by converting these various ingredients into a delicious pizza, thus attracting Value-added-tax (VAT) on it. Last, but not the least, the pizza shop provides service to its customers and hence service tax is also leviable.  With the roll out of GST all these separate taxes would vanish and would be integrated into one. GST shall subsume various central, state and local taxes. It would be a comprehensive tax statute negating the defects of the previous indirect tax system.

GST was first introduced in France in 1954 and today most growing nations like Singapore, Canada, and Australia follow a single levy central VAT or GST on sale of goods and services. If India has to compete in global trade with strong industrial output it needs such taxation model of global standards.

Most of the countries in the world have a GST system in place. Some of the countries even have a single rate GST system. However in India, a dual GST structure is proposed as it functions on a federal system. The Centre would get to implement the GST code thereby increasing its revenues and also promoting a business friendly environment by bringing into force a better indirect tax structure. The states on the other hand would also get to collect their share of taxes. To add to it, any loss of revenue to states as a result of implementation of GST is likely to be compensated by the Centre for certain period of time.

On the other hand, as it is a destination based tax imposed on goods and services, manufacturing states like Gujarat and Maharashtra fear that this will result in huge losses to their revenue after subsuming all state level taxes like VAT, CST, Octroi. Also as liquor contributes to more than Rs 90,000 Cr in revenue to state governments, liquor remains outside the purview of GST.

The Central and State Governments need to understand that it is a fallacious strategy to impose high taxes in order to collect greater revenues. A robust economy with good purchasing power develops faster through growth and innovation.

In the current tax system Centre and the State both levy separate taxes. Goods are taxed on the value which is arrived by considering taxes levied earlier. This results in cascading effect of taxation wherein taxes are levied on taxes. Also to avoid CST inventories are maintained in every state for which extra warehouses are required which divert costs away from any real value-addition. The cascading structure and inventorying costs make Indian goods over-priced and non-competitive in international markets.

The 122nd Constitutional Amendment Bill is set to boost the manufacturing growth in India as it will levy single point taxation on sale of goods subsuming levy of taxes on manufacturing and transportation of goods. As tax system gets logistics convenient businesses can concentrate their strategies towards customer service factors like dependability and timely services. Manufacturers and wholesalers need not file various tax registrations, trucks and carriers may not wait outside municipal checkpoints, and it won't be necessary to maintain warehouses in every state. Thus GST allows businesses to manage a cost-effective supply chain from which inexpensive pricing of goods can prevail in market.

Its not through innovation can a nation initiate a growth in manufacturing; rather, a growing Industrial sector facilitates innovation in terms of technology and automation which in turn further contributes to rapid development of the sector.